Thursday, 10 July 2014

Art Carden and David Neomark on the minimum wage

A case of the seen and the unseen. At the EconLog blog Cardin argues that while the (seen) unemployment effects of small changes in the minimum wage may be small what is unseen is the adjustments that take place on other margins.
In yesterday's Wall Street Journal, David Neumark argued that even though "modest increases" in the minimum wage won't have large disemployment effects, the minimum wage is a poorly-targeted anti-poverty measure: "Minimum wages are ineffective at helping poor families because such a small share of the benefits flow to them."

The broader discussion doesn't appreciate the ways in which firms and workers can adjust to a higher minimum wage without people losing their jobs or even without reductions in the number of hours worked. People do not work for wages alone but for a combination of wages, benefits, workplace amenities, and job satisfaction. Forcing people to pay and accept higher wages means they can compensate on other margins. Maybe you don't get as much general workplace training now (and make no mistake: that is valuable). Maybe you have to pay for your uniform. Maybe you don't get the same employee discount you otherwise would have received. Maybe you don't have as much scheduling flexibility. And so on. I haven't seen a good argument for why we shouldn't think these adjustments are important or for why we are better as a society by forcing people to trade a more flexible schedule for higher wages.
It's worth remembering that jobs like any other commodity have multiple dimensions to them, and changes on one dimension can be traded off against changes on other dimensions. The sum total of all these changes may or may not make workers better-off.

The Neumark article makes a different point, that a higher minimum wage would do little to help poor and low-income families:
A higher minimum wage raises wages of low-wage workers, and even though most evidence points to job losses from higher minimum wages, the evidence doesn't point to widespread employment declines. Thus, consistent with a recent Congressional Budget Office report, many more low-wage workers will get a raise than will lose their jobs. But that argument is about low-wage workers, not low-income families. Minimum wages are ineffective at helping poor families because such a small share of the benefits flow to them.

One might think that low-wage workers and low-income families are the same. But data from the U.S. Census Bureau show that there is only a weak relationship between being a low-wage worker and being poor, for three reasons.

First, many low-wage workers are in higher-income families—workers who are not the primary breadwinners and often contribute a small share of their family's income. Second, some workers in poor families earn higher wages but don't work enough hours. And third, about half of poor families have no workers, in which case a higher minimum wage does no good. This is simple descriptive evidence and is not disputed by economists.
Neumark's basic point is that while the desire to help poor and low-income families is understandable increasing the minimum wage is a misguided way to do it. Other policies need to be looked at. In the US context Neumark suggests using the Earned Income Tax Credit (The United States federal earned income tax credit or earned income credit (EITC or EIC) is a sum deducted from the total amount a taxpayer owes to the state which applies to low to moderate income working individuals and couples—particularly those with children.),
The Earned Income Tax Credit directly targets low-income families, rather than low-wage workers. And my research with William Wascher, using Census Bureau data, shows that a higher EITC boosts incomes of poor families, and even—by encouraging work—leads to more low-income families earning their way out of poverty. The EITC could be made more generous, particularly for childless adults who currently get little from it.

Because the EITC operates through the tax code, it also has the virtue, in this era of rising inequality, of being financed disproportionately by those with the highest incomes. Raising the minimum wage is ineffective on that score because it is paid by those who hire low-wage labor. Some employers of low-wage labor may be rich, but many are not.
Such ideas could be applied to any tax system.

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